Oil recovers prior losses on Fed assurances, supply problems

WTI crude finished up for the week ended June 28, closing at $96.56/barrel compared to $93.69/barrel a week prior. This resulted in a positive catalyst for domestic producers of oil.

From a medium-term perspective, oil prices have been relatively stable and range-bound in the $85 to $100 per barrel range.

The market responded to statements from the Federal Reserve that stimulus measures would not be cut in the short-term and supply disruptions from Canadian oil producing regions.

West Texas Intermediate (WTI) crude (priced at Cushing, Oklahoma) is the benchmark crude for US oil. Therefore, movements in WTI oil prices are a major driver in the valuation of domestic oil producers. Higher oil prices also incentivize producers to spend more money on drilling, which results in increased revenues for oilfield service companies (that is, companies which provide services such as drilling, fracking, and well servicing). Consequently, WTI prices are an important indicator to watch for those owning domestic energy stocks.

Last week West Texas Intermediate (WTI) crude oil prices were up as WTI finished at $96.56/barrel on Friday, June 21 compared to $93.69/barrel a week earlier. On Thursday, officials from the Federal Reserve commented that significant increases in short-term rates would likely be a long way off, allaying market fears that the Fed would soon stop stimulus measures off the back of an improving US economy. Oil prices rallied along with the broader markets. Additionally, oil prices also responded to a shutdown of a pipeline from Canada owned by Enbridge after a spill, creating supply disruptions and requiring certain refineries to seek crude from other sources.

Note that WTI is more representative of the price that producers receive in the US and there is another benchmark for crude called Brent which is more representative of the price that producers receive internationally. For more on the price difference between the two, please see “WTI-Brent spread tightens to levels not touched since early 2011“. As the domestic benchmark, WTI prices matter more for domestic companies such as Chesapeake Energy (CHK), Range Resources (RRC), EOG Resources (EOG), and Pioneer Natural Resources (PXD).

For most of this past year, WTI crude oil has been range-bound between ~$85/barrel to ~$100/barrel. As previously mentioned, higher crude prices generally have a positive effect on stocks in the energy sector. The below graph shows WTI crude oil price movements compared to XLE and EOG on a percentage change basis from January 2007 onward. One can see that crude oil, the XLE ETF, and EOG (one of the largest US-concentrated companies in the energy space) have largely moved in the same direction over the past several years.

As demonstrated in the graph above, crude oil prices are a major driver in the valuation of many energy investments. Oil prices affect the revenues of oil producers, and consequently affect the amount of money oil producers are incentivized to spend on oilfield services. Therefore, this past week’s upward movement in prices was a short-term positive for the sector, furthermore the longer term stable and elevated price of oil has generally been positive. Investors with domestic energy holdings in names such as CHK, EOG, RRC, or PXD may find it prudent to track the movements of benchmarks such as WTI crude.